Songwriters from Dylan to Shakira are cashing in on the buying frenzy started by Merck Mercuriadis. His investors should only be so lucky.
Most music fans have never heard the name Merck Mercuriadis, but they are well aware of the assets he’s been aggressively buying up for the past three years. That includes thousands of songs, including some penned by veterans like Neil Young and Barry Manilow and others from newer artists like Ed Sheeran and Shakira.
As CEO of publicly traded Hipgnosis Songs Fund, Mercuriadis has spent $1.8 billion of investor funds buying the rights to 60,000 songs. The purchases make him the hottest dealmaker among a growing group of investors that now includes Primary Wave, Round Hill Music and KKR, as well as the world’s three major music companies: Universal Music Group, Sony Music Entertainment and Warner Music Group. He says he wants to acquire as many as 150,000 titles, and plans to use them all to empower songwriters at the majors’ expense. All of this has driven up deal multiples and pushed rivals into bidding wars.
“There are plenty of people with my face on a dart board in their offices,” says the smooth-talking, 57-year-old former manager who until recently was best known for running United Kingdom-based music management company Sanctuary into the ground. “We are one of the biggest success stories of the last three years.”
He founded the company in 2017 after two years—and almost 200 pitch meetings—of effort trying to woo investors and started his buying spree with funding of $260 million from 32 investors including the Church Of England, Newton, Investec, Aviva, Axa and JR Hambro. He took Hipgnosis public in July 2018, giving everyday investors a chance to buy into the fund, which last year reported revenue of $65 million.
Song sales
A look at the year’s biggest music deals
It is now at the vanguard of a gold rush that amounted to $4 billion spent on song catalogs in 2019 alone, according to MIDiA research, the latest full-year figures available. Hipgnosis, which accounted for 15% of that, or $590 million, spent another $1.1 billion in 2020. It’s a target rich environment, with expectations for more deals to come as musicians look to seize the bull market for songs and get ahead of potentially higher tax rates under a Joe Biden administration.
The scrum has lifted multiples on music publishing rights — royalties collected from song compositions as opposed to the recordings — from an average of around 10x five years ago to a high of almost 30x today, what Universal reportedly paid to acquire Bob Dylan’s music for some $300 million in December. Those multiples are now at a record high, says veteran music lawyer Peter Paterno, whose clients include Dr. Dre and Metallica
“The buyers aren’t stupid,” Paterno says. “They might be wrong, but they’re not stupid.”
Perhaps. But are investors stupid to follow along? Missouri-based investment bank Stifel downgraded Hipgnosis’s stock to neutral in January, noting its aggressive accounting practices, the untested value of its library and the overly bullish forecasts for their future value.
Hipgnosis assumes royalties from its song catalog will grow every year, which helps to inflate their reported net asset value as soon as they are purchased, a troubling approach when considering catalogs from newer artists such as Shakira and pop-DJs the Chainsmokers. Such opaque assets are best carried at-cost until actual results—earnings, cash flow, transactions—prove otherwise, writes the report’s author Max Haycock. It also bumps values by reducing the discount at which song catalogs are typically purchased from 9% to 8.5%, again a questionable move for newer and untested songs. Changes in the discount rate accounted for more than 80% of the 13% increase in net asset value the fund reported between July and September 2020.
There are similar liberties taken with revenue. It can take at least six months for owed royalties to end up in Hipgnosis’s pockets, so the company reports estimated revenue accrual—what it assumes it made during a period of time, not what it actually banks. In a September interim earnings report, Hipgnosis generated revenue of GBP 64.7 million ($88.9 million USD) from the use of its songs. It also said it had $70 million in accrued income, when it likely actually collected only about $40 million, Haycock writes.
Of course, all of its accounting estimates are validated by its auditor PricewaterhouseCoopers and accounting firm Massarsky, but they are still theoretical. It will take a few years to firm up the true value and resilience of Hipgnosis’s catalogs, notes independent accounting expert Francine McKenna, who says the true value will only be known after Hipgnosis shows what it can do with them in the long run. Universal’s publishing group holds rights to more than 3 million songs that are managed by more than 800 people who assure that they get paid for use on television, radio, movies and from listening. Hipgnosis has less than 2% as many songs and 81 people, and relies on rights management firm Kobalt as well as the three majors to handle the administration for some of its songs.
"One of the great values of publishing catalogs is they can have 20, 30, 40 years of past income history and stability,” says one top music manager, who is skeptical of the Hipgnosis approach; there is a big difference between Dylan’s 1973 “Knockin’ On Heaven’s Door,” which has been covered by the likes of Eric Clapton and Guns n’ Roses, and the Chainsmokers’ 2016 hit “Closer.” Music from the last decade makes up 40% of the Hipgnosis catalog. “Merck, particularly, has bought so many current artists, producers and songs. Who knows where they will be in five or six years.”
Mercuriadis swats away any criticism of his accounting or questioning of his ability to work the songs. He calls Haycock naive, “a small analyst that wanted to put a spotlight on themself by having a contrary voice.” While he admits that catalog values are indeed subjective and valuation multiples “frothy” in some cases, he believes the current bull market for music will more than make up for it. When it comes to the newer music, he says he buys the songs at a low enough multiple that there remains plenty of value to add and that there is months-long delay in collecting on song use, which means past royalties flow directly to Hipgnosis. Earlier this month, the fund raised an additional $105 million; he eventually wants to have $4 billion invested.
That will mean more money in his pocket: Mercuriadis gets paid based on Hipgnosis’s market cap. Last year Hipgnosis paid out $4.9 million in the six months ended Sept. 30 2020 to Mercuriadis’ The Family (Music) Limited. In the six months ended Sept. 30, 2019 he made $2.4 million. His two daughters, Rosa and Melody, the company’s executive vice president of song and brand marketing, and general manager, respectively, are also on the payroll. Mercuriadis would not comment on his personal earnings.
MICHELLE GROSKOPF FOR FORBES.
Getting there hasn’t exactly been a smooth ride. Elton John, Guns n’ Roses and Morrissey were all clients once but have since parted ways with him. He ran publicly-traded record label and management company Sanctuary for two years but then sold it to Universal for pennies on the dollar in 2007. The problem? A deal binge that ran aground due to accounting irregularities and lavish payments to artists. Sanctuary’s own auditors complained in the company’s 2005 annual report that Sanctuary overstated its earnings and understated its losses. Mercuriadis, who was CEO at the time, claims he “did not have financial input or responsibility at Sanctuary,” adding that he “had that title as (he) was the income generator.”
There are now signs his cachet with songwriters is weakening. Sources tell Forbes that artist managers have quietly begun lining up backup buyers in case talks with Mercuriadis fall apart, a break from the exclusive negotiations some willingly entered last year. They say Hipgnosis lost out on at least two recent high profile deals despite offering more money. Sour grapes, says Mercuriadis, who denies this and touts his bond with artists as a competitive advantage. Disco legend Nile Rodgers serves on the company’s advisory board and is a frequent figure in media reports about Hipgnosis. Pop-hit powerhouse Ryan Tedder will be among the leadership of his songwriters union, Mercuriadis says, despite having snubbed an offer from Hipgnosis and selling his catalog to KKR for a reported $200 million last month.
“The buyers aren’t stupid. They might be wrong, but they’re not stupid.”
Above all else, Mercuriadis claims he has not gotten caught up in the bidding wars that have driven up valuations. He insists that, if anything, his valuation methods are conservative and that he has paid a blended multiple of 16x for the rights he’s acquired, with only a few deals made above 20x. Among his collection are two songs he hopes will tell his story even better than he does: 50 Cent’s “Get Rich or Die Tryin’” and Journey’s “Don’t Stop Believin’.”
“Two years from now…there’ll be very little access left in the space,” he says. “That's going to drive the multiples up to—forget about twenties...into thirties and forties for the first time ever. It's definitely a buy and hold strategy.”
